China Says It Will Tighten Monetary Policy in 2011

China's leadership ordered a shift from easy credit to a "prudent monetary policy" on Friday as Beijing steps up its fight against inflation and tries to guide rapid growth to a sustainable level.

The announcement reinforces a change in direction charted this year of modest tightening after the government and banks flooded the economy with easy money to effectively ward off the global economic crisis in 2009.

The ruling Communist Party's top body, the Politburo, decided to "implement an active fiscal policy and a prudent monetary policy" in 2011, said a Cabinet statement.

Beijing raised interest rates Oct. 19, highlighting its divergence from the United States and other major economies, which are trying to boost growth. The central bank said in its latest quarterly report it would "gradually return policy to a normal position," indicating interest rates would rise.

The government is trying to cool inflation that spiked to 4.4 percent in October — well above the official 3 percent target — driven by a 10.1 percent jump in food costs. Analysts say November inflation might rise still higher.

"Growth seems pretty solid and inflation is higher than expected," said Tom Orlik, an analyst in Beijing for Stone & McCarthy Research Associates. "Put that together and it makes sense to shift policy position."

Analysts expect more rate hikes in coming months. Chinese stocks have fallen amid investor concern that might slow growth or choke off credit that is helping to support stock prices.

The country's benchmark Shanghai Composite Index ended Friday down less than 0.1 percent while the Shenzhen Composite Index for China's smaller second exchange fell 0.6 percent.

The Oct. 19 hike pushed the lending rate on a one-year loan to 5.56 percent. JP Morgan & Co. says it expects three to four more increases beginning as early as this month and pushing the benchmark rate to 6.31 percent by mid-2011.

Chinese regulators also have reined in credit by forcing banks to hold back more money as reserves and tighten lending standards.

Economic growth eased to 9.6 percent in the three months ending in September after hitting a post-crisis peak of 11.9 percent in the first quarter. The World Bank and private sector economists expect full-year growth of up to 10 percent.

Inflation has risen well above the 2.5 percent paid on Chinese bank deposits. That has triggered an outflow of cash into stocks and real estate as families seek a better return, fueling fears of a dangerous price boom and bust.

Beijing is trying to rein in food prices by launching efforts to increase production of vegetables and other basic goods. Authorities are cracking down on hoarding and speculation they say are partly to blame for the price rises.

Analysts believe plans for more rate hikes face opposition from officials who worry about raising borrowing costs, especially for investment agencies run by local governments that owe hundreds of billions of dollars to state banks.

"You raise the cost of borrowing for those people and you could have them getting into trouble," Orlik said. "So they are going to be pushing hard against any rapid changes in interest rates."